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European Commission State Aid Investigation Into UK Nuclear New Build

Wednesday 18 December 2013

The European Commission (EC) competition directorate on 18 December 2013 announced a formal investigation into whether the UK Government’s nuclear agreement with the EDF Group and partners for new nuclear reactors violates EU state aid rules. On 21 October, the UK’s Department of Energy and Climate Change, or DECC, announced a commercial agreement with France’s EDF Group for the construction of two 1600 MW European Pressurized Water Reactors (EPR) at Hinkley Point C, in southwest England. The EDF Group have a 45-50% stake in the Hinkley C project, together with AREVA with 10% and the China General Nuclear Corporation (CGN) and China National Nuclear Corporation (CNNC) with a 30-40% ownership.

EDF and partners will be guaranteed a minimum price of £92.50 (USD150) for each megawatt hour (MWh) of electricity generated over 35 years; the difference between this so-called ’strike-price’ and the considerably lower wholesale market price for electricity will be funded by a nuclear levy on UK household energy bills. The average UK electricity price 2010-2013 was £50. The French and Chinese consortium will also benefit from a UK Treasury loan guarantee of £10 billion towards the cost of constructing the Hinkley EPR’s, the current estimate being £16 billion. No details on the terms of these loan guarantees, as well as other financial details of the agreement, have been disclosed.

The European Commission announcement states:

“The Commission will assess whether the construction of a nuclear power station could not be achieved by market forces alone, without state intervention. The Commission will examine the "contract for difference", the credit guarantee as well as the planned level of public support, which is based on many assumptions about the future market situation, and may reach up to GBP 17 billion depending on future electricity prices and the operator’s actual capital cost. During the in-depth inquiry, the Commission will analyse whether the measure involves state aid in the meaning of the EU rules and, in the affirmative, whether it is compatible with common EU rules that authorise state aid for certain objectives of common interest”.

The EU Commission will likely make an initial ruling in early 2014, but a follow on broader investigation could last into 2015.

The current EU framework on competition requires member states wishing to subsidise nuclear power, to ask the Commission for an authorisation. Member states have the burden of proving that:

i) State aid to nuclear energy meets a common EU objective;
ii) it is an adequate instrument to achieve this objective;
iii) in the absence of state aid, that objective would not be met (i.e. a market failure exists justifying the aid), and,
iv) the aid does not go beyond what is necessary to meet the stated objective (proportionality of the aid).

One recent analysis assessed that EDF could earn a Return on Equity (ROE) well in excess of 20% and possibly as high as 35%, with cash dividends of between £65bn to £80bn being payable during the life of the guaranteed price.

During the past years there have been charges that the UK Government was preparing to subsidise new nuclear power projects despite denials from ministers. The agreement is seen by some analysts as giving nuclear power state-aided competitive advantage in cross border trade over and above renewable energy technologies, which are cheaper and quicker to install, threatening to directly contradict EU competition and internal market policy and law.

The decision by the EC will lead to further delays in the Hinkley project as EDF will not give the go ahead for contractors to start building until the deal has received state aid clearance. EDF had said it planned to make its final investment decision in the project by July 2014, but state aid approval from the European Commission could take up to 12 months to complete, which would push the investment decision back even further.

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